Publication of Kurdish PSCs and Baghdad use of Delaying Tactics

It has been three weeks since the KRG (Kurdistan Regional Government) published the Kurdish PSCs (Production Sharing Contracts) and surprisingly there has been very little reaction from Baghdad and the media in general. Before the publication of the oil deals, commentators were speculating about the content of the contracts and allegation of corruption was rife. Nevertheless, so far little evidence of corruption charges pointed at the KRG or companies involved has emerged.

Due to the volume of the documents published it maybe some time before the Kurdish opposition or Baghdad make any comments on the content of the contracts. This may also be due to the ongoing talks between the political blocs to find a way forward on the range of issues crippling Iraqi government.

The publication of the contracts is a step forward for KRG in its transparency initiative. There have been debates within the KRG for some time now weather to publish the PSCs or not, but it appears that PM, Barham Slaih's efforts to open up the KRG has taken a step forward by successfully publishing all the contracts. The initiative is also highly political and annuls Iraqi government's arguments over the transparency of the contracts and corruption allegations.

The Kurdish PSCs have adopted a regressive fiscal regime by having bonus payments at the commencement of the contract. While oil prices go higher and production starts, the incremental cash flow increases with it the contractors' profitability. There have been allegation of wrongdoing and misappropriate use of the bonuses by the government, but so far no evidence of this has merged.

It is not a secret that the Kurdish PSCs are on more favourable terms compared to TSCs on offer by Baghdad. Companies that entered PSCs with the KRG enjoy a higher rate of return and their windfall profit is significantly higher if the oil prices stay above $70.

While Iraqi oil export is about to hit 3 million bopd- pre war production level- soon, Kurdistan region has not been able to increase oil production as fast, largely due to infrastructure limitation and partly because of the political impasse with Baghdad and geopolitics. The political deadlock with Baghdad has been eroding confidence and holding back many investors and companies which otherwise will be willing to invest in the region.

Kurdistan Region has deliberately given favourable terms to the oil companies to attract as many operators as possible and managed to do that successfully. Policy makers appear to believe that it is a price worth paying to gain a control over the vast untapped oil and gas reserves in the region. Kurdish control over its natural resources give the KRG the influence it needs to be listen to in Iraq and the region.

Kurdish PSCs typically gives the oil operators five years period for exploration and in some cases it can be extended by another 2 years. Some contracts have been awarded since 2007 and the companies involved have undertaken their obligation under the contracts by surveying the blocks and undertaking a drilling campaign at a considerable expense. Many have been successful and few suffered setbacks. A number of operators are ready or will be in a position to start production soon. However, due to lack of infrastructure and political disagreement with Baghdad, more delays expected.

The debate over a suitable oil and gas law is still raging and different versions of the law put forward by different blocs yet to be agreed upon. It is unlikely that the law will make it to the statute book any time soon. The Iraqi deputy PM for Energy matter, Hussain Shahristani, continues to challenge the Kurdish PSCs and only today he was quoted by Reuters repeating the his stance on the Kurdish deals and declaring them illegal. He has also reiterated the exclusion of companies operating in Kurdistan from Iraq.

While the political wrangling continues, oil companies are becoming nervous. Baghdad appears to be using a delaying tactics. Time is of the essence for the Kurdish oil contracts and the companies involved in the region will inevitable face challenges. The longer the stalemate drags on, operation and financing cost will mount. Although the exploration period can be extended for a limited period, smaller operators will find it difficult to raise funds in the future and may be forced to sell or relinquish part of their obligation under the contract at a cost. It is needless to say that under the terms of the contracts, large part of the cost is recoverable and the longer the disagreements carries on the KRG and Iraqi government will ultimately incur increased cost, as and when oil production starts.

Consolidation is already taking place as Vallares-Genel and DNO-RAK merger is concluding. Moreover, Gulf keystone petroleum has raised $ 200m and is looking for a buyer to sell its 20 per cent interest in Akri-Bijeel block, possibly fund new pipelines exporting oil from its mega oil find. Larger oil companies like Hess has entered the region and Others are weighing their options and some are negotiating their contracts.

Kurdistan region's bold oil and gas strategy has so far proved effective by attracting investors and upstream operators however; exporting the hydrocarbon and building up the much-needed infrastructure will require a fresh approach.